Iron and metals slump as Moody’s puts China’s debt in spotlight

Iron ore led a slump in industrial commodities after Moody’s Investor Service downgraded China’s credit rating, highlighting the challenge for the nation’s leaders in maintaining growth while controlling debt.

Iron ore futures on the Dalian Commodity Exchange closed the morning 4.7% lower at 456.50 yuan a metric ton, extending Tuesday’s 3% loss. Nickel led a broad slump among base metals, dropping as much as 2.1% to $9 150 a ton on the London Metal Exchange. China’s the top user of materials.

Moody’s move, downgrading China’s debt to A1 from Aa3, is a hit to sentiment that highlights looming difficulties for the country’s economy, said analyst Helen Lau at Argonaut Securities (Asia).

“Markets have of course been worried about increased debt in China already, but when a ratings agency comes to this analysis, then it makes the problem more official,” Lau said by phone from Hong Kong. “China is at a crossroads in terms of what it does about debt. If it tightens, then potentially it makes things worse, but if it eases then it creates more leverage.”

Materials have benefited in the past year from a credit and infrastructure splurge that’s supercharged China’s so-called old economy, lifting demand to varying degrees. Steel reinforcement bar prices hit a five-year high this week, while the index of the six major LME metals rose to a three-week high, even as signs of tighter lending conditions had begun to surface.

President Xi Jinping’s government is seeking to meet its target of 6.5% economic growth this year while attempting to address excess leverage and deflate assets bubbles. China will become increasingly reliant on policy stimulus, including spending by government and state-owned entities, to prop up growth, Moody’s said.